You've retired from the railroad and now you need income in retirement. Understand how you're going to get that paycheck in railroad retirement.
Welcome everyone to the Highball Advisors Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors and today, we're going to talk about getting a paycheck in Railroad Retirement. So what am I talking about, right? It's not going back to work. It's your guaranteed income streams that you're going to need to sustain your lifestyle in retirement, right? So you're building up these income streams as you're working through all these years. So let's review what a railroader's income stream would look like. All right?
So the Railroad Retirement Board, obviously, the benefit, the retirement annuity. First up is the Tier One, which is a combination of maybe if you have social security years and your railroad service, 35 years of your average indexed monthly earnings. So that's going to give you your number and draw your attention, that will adjust every year to inflation, CPI. So that's important. And then obviously railroaders who have 30 years, you can get full retirement age at 60. So that's 60 and 30. So that's one stream, right?
A second stream is the Tier Two part of the railroad retirement annuity is your top five earning years that you paid into Tier Two and just on the CPI, because we're always concerned in retirement about making sure your money lasts. Because you're going to have inflation in retirement, so you have to keep an eye on inflation because you never know when it could really affect you. Especially retirees, you have healthcare, inflation runs very high. But so the CPI, the inflation on Tier Two is only about a third of that. So you have a little drop off there. And then also full retirement age, once again there is at 60 and 30. So 60 years old.
Now, some railroaders are fortunate enough to have pensions so that's another guaranteed retirement income stream. And they could start collecting this with some railroaders' early retirement pensions and then there'll be reduced as the railroad retirement benefits kicked in. A lot different railroads have different ways that they go about pensions, but that's kind of the way it is. And most pensions have no inflation riders. So that's important to know. And then you have years of service to find the pension. So those are three guaranteed retirement income streams. Very, very important.
Now the fourth one that I'll mention here is really up to you and how you want to draw it down, how you want to imagine it. So this is your 401K withdrawal strategy. So you want to determine the amount of guaranteed income that you're going to need out of there. There's certain strategies that you can use. I know at Highball Advisors with my clients, I use a guard rails type strategy, which is really a dynamic withdrawal strategy based on how the market's doing. And because if you looked at one of my previous, actually a webinar, retiring with too little or too much money, you can actually retire with too much money at the end of your plan if you don't take out enough of the money. But anyway, so that's your fourth stream. So we have four retirement income streams, or as I like to say, paychecks that could be coming in there right.
Now, you have these paychecks and we want to look at how you want to think about managing or spending those paychecks, so to speak. So I look at retirement expenses two ways. I have my essentials expenses and then I have my discretionaries. So your essentials are obviously clothing, shelter, food, healthcare, utilities, cable, Netflix, maybe dining out once a month or once a week, depending upon what you're looking to do, some physical activities, always important, maybe the Y or the golf course, something along that. So those are essential. So I like to have the guaranteed paychecks take care of the essentials. And what do I mean by the guaranteed paychecks? I know exactly what I'm going to be making with Tier One, Tier Two and pension, if you have the pension. So I put that in the guaranteed section. So if you can have your essentials covered with your guaranteed paychecks, that's great.
And then the bonus paycheck, as I like to put it, is your discretionary spending. Hey, maybe I would like to get a new car, maybe we'll travel this year, vacation house, a second home, that type of thing. That's discretionary expenditures or bonus paycheck. And that would really come out of the 401k, that withdrawal strategy. Because you can tweak this up or down. Market has a down cycle, I know with our guard rail strategy, if the market's down 20%, you can expect a 10% cut in the paycheck strategy that I use on the withdrawal of the 401k.
So that's the way I like to approach it. Your guaranteed paychecks are very important, understand your expenses, very important. And this is the foundation of your retirement and your retirement income and your retirement expenditures. So I hope you found this very helpful. What I do here is what I do for my clients and for potential clients, is that Railroad Retirement Assessment, come onto Highball Advisors and sign up for that and you can get a good look at this of where you are in this process, understanding your income and understanding your expenses. So just sign up for that. It'll be well worth your while.
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